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The Reserve Bank of India (RBI) recently recognised the Fintech Association for Consumer Empowerment (FACE) as a self- regulatory organisation for fintech (SRO-FT) and is in the process of examiningtwoother applicants. The fintech ecosystem in India is the third largest in the world, with an estimated 10,000 registered firms which operate across financial services.
The relationship between fintechs and incumbent regulated entities (RES) started out as a competition, and has now reset to that of collaboration. Fintechs now act as technology service providers or as an agent institution of the regulated entities, enabling digital delivery of financial services.
Given that fintechs are unregulated, there are no regulatory entry barriers for the ecosystem. And REs are increasingly engaging with fintechs to digitalise and automate several business operation processes.
In some cases, the latter directly interacts with the REs customers. While there are no explicit regulatory instructions issued to fintechs by the RBI, there are implicit expectations from them on matters of market conduct, governance, risk management, cyber security, among others. This is to ensure issues on customer protection, data privacy and market integrity are proactively addressed. But how do these implicit expectations get communicated to fintechs and, more importantly, who ensures ongoing adherence?
A critical component of SRO-FT role will be to monitor unethical or dubious practices and take steps to address them
This is one of the key roles that the SRO- FT recognised by RBI are expected to play. And this is unprecedented in the Indian context:all recognised SROs by the RBI previously constituted of members which are regulated by RBI. Therefore, the basic structure of SRO-FT and the role it is required to play for the fintech ecosystem is likely to be very different from the role the other SROs are playing. Since fintechs are still young and are extremely diverse in terms of scale, business model and maturity of operation, following will be few of incremental expectations from the SRO-FT:
Ease of doing business: Navigating the regulatory landscape can be inherently challenging for the young fintechs. SRO-FTwill be required to play a developmental roleby providing guidance to fintechs to aid comprehension of applicable guidelines and help improve compliance posture within the community. Establishing certain accreditations for the members shall enhance trust for accredited fintechs amongst the broader RBI REs, facilitating ease of collaboration between the two.
Standardsetter: Baseline standards on market conduct, governance, risk management, cyber security will be developed by SRO-FT for the members to adhere to. The diversity of fintechs will make development of common baseline standards for all to adhere to a challenging one. However, this key initiative needs to be undertaken to ensure regulated entities are comfortable with collaborating with the fintech
community.
Watchdog: Trust building is a slow burn exercise. Fintechs are still on that journey to establish trust amongst the financial services community. A critical component of SRO-FT role will be to monitor unethical or dubious practices and take steps to address them lest theseoutlier firms seriously undermine the reputation of the fintech ecosystem. SRO-FT membership is purely voluntary, and here's the rub. Fintechs are unregulated and are under no obligation to become members of SRO-FT. So why would fintechs bother with SRO-FT when there will be additional obligations cast on them and they will also be surveilled? Fintechs will realise that in the long run, SRO-FT membership will likely become fundamental to their success in financial services.
SRO-FT will improve access to partnerships, minimise business disruption due to regulatory actions, provide peer to peer learning opportunities and allow them to have a seat at the table to shape the future of the fintech ecosystems. And probably most important of all, they will have a strong ally on their side to take up matters of importance with the regulators and the government.
This article first appeared in the Business Standard on 03 November 2024.
